Insurance or Investment?

Back in the 70s and 80s buy term life and invest the difference was all the rage. It became an instantaneous sensation like cheap wine in a box and Dorthy Hamill hair styles. Traditional life insurance companies were astonished that suddenly American consumers turned their noses up at good old fashioned, high commission, low cash value whole life insurance, in favor of pure protection and a crack at getting stinking rich. Why it was positively un-American, according to the insurance executives and drove them nuts and their math whizzes to the drawing boards.

Salespeople, labeled Termites, by those holier than thou traditionalists, sold the concept and excited an entire generation of consumers on how they could have a cheap death benefit but also an investment where they could earn seven or even ten percent by buying mutual funds that invested in the American economy.

Buy low cost term life and invest the difference into a mutual fund was and is a great idea except for one problem - people wouldn't do it for the long term. They would agree to the concept, drop their existing insurance in a heartbeat but after a year or two decide that it wasn't for them. The money earmarked for investment was directed into custom bowling balls, Vegas weekends and a new side by side refrigerator.

The traditional insurance industry meanwhile countered with insurance contracts that married both the term and investment sectors together. In what were then and now called variable life the insured could decide where they wanted their saving portion to be invested. What policyholders were doing was assuming the risk management that used to be the function of the insurance companies. The insurance cash value accumulation was vital to maintain a level premium and death benefit. Back in the day that's what clients paid the insurance companies to do. With the new products, and in most cases, people did not know that they were now responsible for their own risk management. Buying a variable product became much like going to the big box store and doing all the heavy lifting and paying the store for the privilege of doing so. Led by insurance agents, who for the most part, couldn't define a dividend from a cap gain, a lot of people who were supposed to manage their cash value accounts simply spread their money around a lot of different indices that they didn't understand and then put everything on cruise control. It didn't surprise too many people in the industry when these policies crashed and burned and a lot of dissatisfied customers were dialing 1-800-LAWYERS.

Now, after an absence of several decades, whole life insurance is again emerging as a respectable product. It has guarantees. You don't have to worry about internal investments or choosing which sector you want the cash value to be invested in. Your premium goes into one pool of fixed income investments and there is always enough cash to pay death benefits or cash someone out if they need or want to. It's the perfect dumb product like the passbook savings that will be there when you want and need it. The best thing of all the risk is back to whee it belongs at the insurance company whose name is printed on the policy tucked away in your sock drawer.

But now some folks are back to their old tricks and selling whole life as an investment. I just read a WSJ article where the writer fairly gushed over the tax-deferred investment returns on whole life. I have to let you know that life insurance is not an investment. It never was, is and folks could get more than their hands slapped for saying or writing so. Fifty years ago that's exactly how whole life was sold as a conservative long term savings plan that just happened to have a death benefit. The states insurance commissioners cleaned it all up and made it clear that life insurance is a death benefit that is meant to be a replacement of income or economic loss. The increased savings inside a whole life policy acts as a hedge in order for the insurance company to be able to provide a fixed premium for a level death benefit. Removing the cash value decreases the death benefit. And, as we know from buying pure term life costs increase as people age and get closer to mortality.

If you want to buy whole life insurance do it because you need the protection for a long period of time, not a tax gimmick or someplace to store dollars from the taxman. It's that simple.

If you have questions on anything contained in this blog write to Paul Stanley at pstanley@westminsterfinancial.com or call 877 783 7080. Share this blog with someone you know.